Asia Aviation

Asia Aviation Plc (AAV)
Investment thesis
Expectations of solid QoQ core earnings growth in 4Q13 will catalyze the share price catalyst in the near-term, we expect. Furthermore, AAV’s hefty core profit expansion profile—an FY13-15 CAGR of 46% against 8% for the SET—will make for long-term price upside. The stock currently trades at an FY14 PEG ratio of 0.3x, a discount to the regional low-cost carrier mean of 0.5x. Given its superior profit growth profile, we think AAV deserves to trade at a premium to Asian peers. 
Solid YoY earnings growth expected for 3Q13
We estimate a 3Q13 net profit of Bt159m, up 47% YoY but down 40% QoQ. Stripping out an assumed FX gain of Bt18m, core earnings would be Bt141m, up by 39% YoY and 6% QoQ. The drivers of the modeled core profit expansion were: 1) fleet expansion, 2) greater air traffic and 3) higher ancillary income (despite a lower average seat fare and higher SG&A expenses).
AAV’s fleet expanded to 31 aircraft as of end-Sept from 25 at in Sept 2012 and 29 at end-June 2013. The number of passengers in 3Q13 is estimated to have increased by 25% YoY and 1% QoQ to 2.5m, while the loading factor is expected to have risen to 83% from 82% in both 3Q12 and 2Q13. 3Q13 ancillary income should have been stable YoY, but risen 2% QoQ to Bt341/passenger. However, intense competition in the domestic market has resulted in: 1) a lower mean seat fare (down by 3% YoY and 2% QoQ to Bt1,849) and 2) higher SG&A expenses—the SG&A/sales ratio is estimated at 7.5%, up from 6.8% in 3Q12 and 6.1% in 2Q13. 
High tourism season to drive strong QoQ earnings growth in 4Q13
The fourth-quarter is normally the start of high season for Thai tourism. AAV’s passenger numbers usually jump about 16% QoQ in that period. Moreover, its fleet will expand to 35 aircraft by year-end. Even though capacity will rise YoY, the loading factor is expected to be sustained at about 83% in 4Q13, supported by seasonality, increased flight frequencies and new destinations. In addition, ancillary income should rise QoQ, driven by the launch of a new ancillary product—Fly Thru. However, SG&A expenses are expected to increase YoY, due to a heavy marketing campaign for the domestic market. As such, AAV’s 4Q13 core profit is likely to rise QoQ, but be flat YoY.
Aggressive marketing campaigns prompted profit forecast cuts
In tandem with the launches of new destinations in 2H13 and 2014, the firm’s marketing spend has ramped up in order to build brand recognition and market share. As such, SG&A expenses have increased. We have downgraded our FY13 net profit forecasts by 8% to Bt1,214m for FY13 and by 6% to Bt1,999m for FY14 in order to factor in higher SG&A/sales ratio assumptions of 6.5% (up from 5.4%) for both years and have cut our YE14 target price to Bt6.90 (from Bt7), pegged to an FY14 PER of 12x and YE14 EV/EBITDA ratio of 7x.